Loan fails but builder still keeps deposit

Dear Steve,
My boyfriend and I were in the process of buying a new home and were pre-approved for the loan, but we didn't close due to the longer-than-expected construction process. Now, my boyfriend just found out he lost his job and the lender tells us we're no longer approved. The builder said, sorry, he won't refund us our deposit. Is this legal?
-- Terri

Dear Terri,
So sorry to hear about the lost job. Whether the builder can legitimately retain your deposit or not depends on your purchase contract. But it sounds as though you don't have that built-in "mortgage contingency," allowing you to pull out of the deal without losing your deposit in the event that financing falls through. Or you may have had such a contingency, but the pull-out period may have elapsed before your boyfriend lost his job. These days, more buyers are writing "employment contingencies" into contracts to protect themselves should a job loss occur during the buying process.

In many states, builders and developers are only allowed to recover out-of-pocket costs of a maximum 3 percent as "reasonable damages" for buyer nonperformance, or the equivalent of $6,000 on a $200,000 home purchase. But it is still possible to prove in court that the 3 percent is unreasonable based on extenuating circumstances and/or the developer's ability to sell the house to a different buyer without losing money. With only some exceptions, builders aren't inclined to relinquish contractually owed money these days because new-home sales remain exceedingly flat. Some will allow buyers to transfer their contracts to other parties under certain circumstances.

There may be a few other possible "outs." If you have a cancellation right in your contract tied to an established construction time frame that hasn't been met, such as the construction delay you mentioned, there could be relief. Your contract also may have an arbitration provision for dispute resolution.

In any event, you may need to consult a good real estate attorney to see just how ironclad the builder's position is. However, first consider asking the builders or builders' agent what your withdrawal from the sale will actually cost them. If they know you're going to dispute it, they may settle on giving you part of your deposit back to avoid litigation costs or the hassle of arbitration.

As an aside, a good buyer's agent will make sure all your options are penciled into builder contracts.

Good luck to you boyfriend on his job search and to you both on resolving this. There are a lot of others in the same boat.

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